Australia’s housing market is slowing, amidst modest economic growth. House prices rose by 4.65% in Australia’s eight major cities during the year to end-Q2 2016 (3.63% inflation-adjusted), a sharp slowdown from an annual rise of 10.53% a year earlier - and the lowest y-o-y increase since Q1 2013, based on figures from the Australian Bureau of Statistics (ABS). House prices increased 2.27% (1.9% inflation-adjusted) quarter-on-quarter in Q2 2016.

Melbourne saw the biggest increase, with residential property prices rising by 8.2% (7.1% inflation-adjusted) during the year to Q2 2016, followed by Canberra (6%), Hobart(4.9%), Brisbane(4.3%), Sydney (3.6%), and Adelaide (3.5%). On the other hand, residential property prices dropped in Darwin(-6.5%) and Perth (-4.8%) over the same period.

The mean price of residential dwellings in Australia was AU$623,000 (US$470,830) in June 2016, up 3% from the same period last year, according to the ABS.

New South Wales, especially Sydney, has the most expensive housing in the country, with the mean house price at AU$880,000 (US$665,000) in Q2 2016, about 30% above the national mean house price. In contrast, Tasmaniahas the cheapest housing in Australia, at a mean price of AU$320,000 (US$241,840) over the same period.

While the Reserve Bank of Australia, the country’s central bank, had recently indicated that the risk of a housing market bubble had “diminished”, some critics still believe that Australia’s housing market remains severely overvalued.

The Economist estimated that Australian house prices are overvalued by more than 40% as of last year.

According to the 2016 Global Real Estate Bubble Index published by investment bank UBS, Sydney housing market now ranks in the bubble risk category and tops all other cities in the region. Based on the report, Sydney real house prices increased by about 45% from 2012 to 2015 while income and rents had stagnated over the same period.

According to the International Monetary Fund (IMF), housing market risks in Australia remain heightened, especially in Sydney, mainly due to investor credit and interest only loans. House prices are estimated to be moderately overvalued by about 10%.

Demand continues to rise. In the first three quarters of 2016, purchases of established dwellings rose by 5.3% to 422,765 units from the same period last year, according to ABS. In fact, the value of established dwelling purchases rose by 8.3% to almost AU$153.66 billion (US$116.13 billion) over the same period. Likewise, purchases of new dwellings increased 14.5% y-o-y to 23,267 units in the first three quarters of 2016 while the value of new dwelling purchases soared by 18% to almost AU$8.72 billion (US$6.59 billion) over the same period.

Australia’s economy grew by a modest 2.4% in 2015, after GDP growth of 2.7% in 2014, 2% in 2013, 3.6% in 2012, 2.7% in 2011, 2.3% in 2010 and 1.8% in 2009, according to the IMF. The RBA kept the official cash rate unchanged at a record low of 1.5% in October 2016, after cutting it by a cumulative 50 basis points in May and August 2016, in an effort to stoke price growth and bolster the economy.

Acquisition of residential real estate by foreign nationals and corporations is subject to FIRB approval. Foreigners are not allowed to buy an established (previously occupied) house. They may buy an unoccupied new dwelling, but only if the FIRB feels that the purchase will not add to the shortage of properties available to native Australians.

Our Sydney apartment survey is based on the number of bedrooms, because so few advertisements cite square metre measurements. A 1-bedroom apartment costs around US$ 500,000, and a 3-4 bedroom apartment around USD 1.8 million. Amazing prices! Monthly rents average US$ 2,000 for 1 bedroom apartments and US$ 4,300 for 3-4 bedroom apartments. So the gross rental yield for apartments, i.e., the gross return on investment in an apartment if fully rented out, ranges widely, from 2.8% to 5.0%.

Rental income: Rental taxable income earned by nonresidents are taxed at progressive rates, range from 32.50% to 45%.

An owner may also be required to pay a land tax annually, depending on his property classification for tax purposes and property location.

Capital Gains: Individuals are subject to a 50% reduction of the taxable gain if the asset is held for at least 12 months. Capital gains follow the individual income tax rates, at rates from 32.50% to 45% for nonresidents.

Inheritance: There are no direct taxes on inheritance.

Residents:Residents are taxed at a progressive rate on their annual income, from 0% to 45%, and are required to pay a 1.5% Medicare levy.

Roundtrip transactions costs are 3.76% to 21.15% of the property value. Stamp duty on property transfers ranges from 1.5% to 6.75%, and is paid by the buyer. It takes about five days to complete the five procedures needed to register a property.

Rents: Rents can be freely negotiated, but increases are subject to review by a Tribunal provided the tenant makes an application. The rent cannot be increased before the end of the first year of tenancy in any state.

Tenant Eviction: A landlord can terminate a tenancy by giving notice in the approved form, or by using the tribunal. The legal system is highly efficient: it takes an average of 44 days to evict a tenant.

Australia is one of the most attractive places to live, judging by all indices of income, human development, healthcare and civil rights. It had a GDP per capita of US$51,642 in 2015, according to the International Monetary Fund (IMF).

In the second quarter of 2016, Australia’s economic growth accelerated to 3.3% from a year earlier, up from an annual growth rate of 1.9% in Q2 2015 and the fastest pace seen in four years, according to the ABS, fuelled by strong domestic demand.

Economic growth was 2.4% last year, down from average annual growth of 3% from 2000 to 2014, according to the International Monetary Fund(IMF). The economy is expected to expand by 2.9% this year, and by another 2.7% in 2017.

The Australian dollar (AUD) rose about 7.2% against the US dollar during the year to October 2016from AUD1 = USD0.7099, to AUD1 = USD0.7613, according to the RBA.

Earlier, the AUD had lost around 25.6% of its value against the USD, from June 2014 to September 2015.

The country’s current account deficit was equivalent to 4.6% of GDP in 2015, from 3% in 2014, 3.4% in 2013, and 4.3% in 2012. But during the year to Q2 2016, the currency's decline pushed the country’s current account deficit down by 26.6%,to about AU$15,535 million (US$11,741 million), , according to the ABS.

In September 2016, unemployment dropped to 5.6%, from 6.1% a year earlier, according to the ABS. There were about 705,100 unemployed persons in Australia in September 2016, down by 8.5% from a year earlier.

Consumer prices rose by 1.3% in Q3 2016 from a year earlier, up from 1% in the previous quarter, but down from 1.5% from a year ago. Australia’s nationwide inflation rate averaged 3.1% during 2008-2011 before declining to 2% during 2012-2015.

The RBA kept the official cash rate unchanged at a record low of 1.5% in October 2016, after cutting it by a cumulative 50 basis points in May and August 2016, in an effort to stoke price growth and bolster the economy.

Strong and stable economy

Low to moderate transaction costs

Tenant-neutral rental market

Strong rental market for migrants

Moderate effective income tax rates

Prices have risen too far, too fast

Interest rates are rising rapidly

RESIDENTIAL PROPERTY FACTS

Price (sq.m):
$7,250 For a 120 sq. m. property, usually an apartment.

Rental Yield:
4.39% For a 120 sq. m. property, usually an apartment.

Rent/month:
$3,182 For a 120 sq. m. property.

Income Tax:
24.38% Assumptions: Owners are a non-resident couple drawing US$ / €1,500 per month in rent, with no other local income.

Roundtrip Cost:
12.46% The total cost of buying and then reselling an apartment. Includes: